Climate finance: definition, hopes and main barriers with Barbara Buchner

“The public sector alone will not be able to finance the low-carbon transition. Private investment is key.”

Dr. Barbara Buchner is Executive Director of the widely renowned Climate Finance program at Climate Policy Initiative. Named one of the 20 most influential women in climate change by the International Council for Science, Barbara’s main mission is to advise leaders on climate, energy, and land use investments around the world.

Hello Barbara Buchner. Where does your commitment to climate change come from?

I grew up in Austria, a beautiful small country blessed by natural resources and high quality of life. Protecting the environment and being careful about resources was part of my daily behaviour from when I was little, and to me it therefore seemed to be the normal way of life. However, when I was 12 years old the nuclear accident in Chernobyl happened. We could not leave the house for days and for the rest of the summer we were not allowed to play outside because the nuclear clouds had left radioactive dust on the streets. We were not allowed to eat mushrooms for the rest of the year (and where I come from, we have delicious mushrooms!). This early experience with how precious the environment is shaped my worldview, and ultimately my career trajectory.

I got deeply concerned about the environment, even more so when I learned about global warming, and I promised myself that I would do what I could to help save our world. The Rio Earth Summit took place in the year in which I started university, and at that point I was convinced that in order to really change the world’s pathway the solution was to learn the language of policy makers, scientists and business in order to really understand the risks and opportunities arising from threats such as climate change and the incentives needed to mainstream sustainable development in daily decision-making. So I decided to study economics and environmental sciences, a program that I had to fight for as it didn’t exist yet as a regular program at my university (it was based on a program I had seen from ETH Zurich).

I think that one thing many people don’t realize about climate change is that it is inextricably linked with development and quality of life. This goes both ways: While climate change, if left unchecked, will have disastrous impacts on the development gains made in the past twenty years — things like people’s’ access to clean water, food, and energy — it’s equally true that the solutions for climate change are tied with how we live. From an economics standpoint, the only way forward is to produce food, energy, water, shelter — all the things we associate with development — more efficiently to ensure people around the world have access to these development gains, but that they don’t put future generations at risk. This goal is what motivates me, both from an academic standpoint and from a personal one. From this perspective, the work that CPI does is a natural fit.

When was Climate Policy Initiative founded and what are its missions?

CPI was founded in 2009 to help nations grow while addressing increasingly scarce resources and climate risk. Policy and investment is key to achieving this and so we work to improve the most important energy and land use policies and business practices around the world, with a particular focus on finance. Our analysts and advisors support decision makers through in-depth analysis on what works and what does not. We work in places that provide the most potential for policy impact, including Brazil, China, Europe, India, Indonesia, and the United States. Our services include advisory and convening, analysis and assessments, and design and implementation of new solutions.

What does “climate finance” mean?

It depends who you ask! In the context of the international climate negotiations undertaken by the United Nations Framework Convention on Climate Change, “climate finance” often refers to flows of funds from developed to developing nations to help poorer countries cut emissions and adapt to the effects of climate change. Different nations have not yet reached agreement on what should count towards developed nations’ commitments to mobilise finance. CPI works to improve definitions and methodologies to better track finance in this area and to create greater transparency on debates as to what should count.

We also often consider “climate finance” more broadly in our work as any public or private investment or support that reduces emissions or builds resilience to a changing climate. This allows us to measure progress against investment needs, identify gaps or blockages in finance flows, and supports decision makers in making more effective interventions. This broader definition is the one we use in our work to capture global climate finance flows.

How much money do we need every year worldwide to address climate change? And where do we find this money?

The IEA estimates that we need to invest over USD 1 trillion a year in the energy sector alone to have a chance of limiting warming to two degrees or less. In the context of global investment in the energy system as a whole, including all the investment and support for polluting fossil fuels, this isn’t as much as it sounds at first. The investment for the low-carbon transition is already out there. The New Climate Economy report estimated that total additional infrastructure investment needs from a low-carbon transition up to 2030 could be just US$4.1 trillion across the world. Unfortunately, we are still spending too much on the high-carbon economy. This is where most money will need to come from. We need to shift investments from traditional “brown” activities to sustainable “green” ones. Given the magnitude of the challenge, and the scarcity of public resources, there is a need to use public resources most effectively to unlock private finance at scale, including from actors such as institutional investors who currently are still at the margins of climate action.

The role of the CPI is to convince the public sector to invest in new models of growth such as renewable energy. Why is it so important to work with both the private and the public sector?

The public sector alone will not be able to finance the low-carbon transition. Private investment is key. 62% of total global climate-related investment in 2014 was from the private sector though a lot of that investment is driven by public finance and support whether in the form of regulatory frameworks or feed-in tariffs.

CPI helps public finance providers to understand how to spend their money as effectively as possible in order to crowd-in private finance. Aligning public and private capital effectively is the way forward to filling the investment gap.

What are the main barriers that stand in the way of scaling up finance to fight climate change?

Based on our work and interactions with investors we have identified three main barriers to investment:

• Policy gaps, including regulatory frameworks and retrospective policy changes. An important insight from our work is that overall, the majority of climate finance was raised and spent in the same country — about 74% of total climate finance flows, and up to 92% of private was domestic finance. This confirms the strong domestic preference of investors identified in previous years’ Landscape reports and highlighting the importance of domestic frameworks for attracting investment. Because domestic investment dominates, it is vital to get domestic investment policy and support frameworks right.
• Knowledge and awareness gaps. Investment opportunities are often not well or not all known and there is a lack of transparency / information of risks related to climate change. Understanding climate vulnerability and risks is essential to integrating climate change risks (or opportunities) into investment or financing decision-making
• Risk, viability and funding gaps. Often, a viability gap exists between a ‘business-as-usual’ investment and a climate investment. The viability gap can exist because investments in green technologies can have additional or higher up-front costs, insufficient revenues, or face risks and information gaps that can discourage investors. Investors indeed perceive a range of risks in green investments, and not all risks covered by existing risk mitigation instruments (particularly policy and financing risks). Inadequate access to finance, including unsuitable terms and conditions, or uncertainties about the returns of investments and risk aversion reduce investors’ incentives of focusing on climate investments.

What did the Paris Agreement changed for financial institutions? Why was it good news? What was the message sent to businesses and governments?

The agreement signals a historic momentum, as it for the first time brings all nations into a common cause based on their historic, current and future responsibilities. It sent a clear signal on the direction of travel, steering governments and businesses away from fossil fuels, towards sustainable growth. There is already a lot of investment in clean, resilient growth happening around the world. Governments and business are making these investments because they make economic sense. In fact, 74% of total finance is spent domestically. Paris sent a clear signal to accelerate the move from a high-carbon to a low-carbon growth trajectory.

The COP 22 will be in Marrakech in November 2016. What are you expecting to achieve this year in terms of climate finance?

The challenge now is to turn the successful talks into action and the pledges on climate action countries made prior to Paris (in their nationally determined contributions) into investment frameworks and plans and eventually projects on the ground. This is something CPI is assisting by working with governments, development finance organisations and others through “The Lab” (see below) and more direct support.

An important aspect of the Paris Agreement was its tasking of the UNFCCC’s Subsidiary Body for Scientific and Technological Advice (SBSTA) to develop accounting rules to better track public climate finance and increase transparency by 2018. Developed countries also committed to continue reporting every two years on finance they’ve provided and mobilized, and also start reporting on public funding they intend to provide in following years. The Agreement encourages developing countries to also follow this practice too.

Can you talked to us about the Lab. What was the idea behind it when it was created in 2014? How does it work? What kind of projects are you developing? How do you choose the projects?

The Lab was developed in 2014 by the UK, U.S. and Germany in partnership with several climate finance donor governments (Denmark, France, Japan, the Netherlands, Norway) and key private sector actors. These partners aimed to concentrate their relative strengths to support work to test innovative approaches to delivering climate finance. By also drawing on the experience and expertise of relevant actors in developing country governments as well as a broader network of experts, the Lab ensures that climate finance instruments are implementable and address real investment needs.

Lab members comprise a small, senior group of policy makers, financial experts, practitioners, and project developers. These experts identify, select, help develop, and ultimately help to support the projects that are selected. Selection is based on four over-arching criteria, so to be selected, projects must be innovative, actionable, catalytic (i.e. can mobilize private finance at scale), and financially sustainable.

The Lab is a high-profile initiative that has gained wide- recognition by governments — for example, in 2015 the Global Lab and its instruments were endorsed by the G7. It provides an example of an initiative that supports the kind of public-private engagement and innovative financing instruments that will be essential for effective implementation of the Nationally Determined Contributions (NDCs) and increased ambition, which in turn will be essential to ensure that we move towards a below two degree Celsius pathway.

Could you take one example of project the Lab has developed and how concretely the Lab has helped this project/community?

Sure. I would point to Energy Savings Insurance, which ensures the financial performance of energy efficiency savings projects. Energy efficiency has huge potential for emissions reductions, but as a sector, it hasn’t reached the scale needed. The Lab helped to develop and refine the concept for Energy Savings Insurance, and since the instrument was endorsed in 2015, the Lab has helped the Inter-American Development Bank take forward this instrument in Latin America to reach small and medium-sized businesses improve energy efficiency, including by reaching funders, providing analysis and expert support. The Lab has also helped pave the way for expansion into other regions, like India, which is under exploration now. In July, Energy Savings Insurance hit a big milestone — the Green Climate Fund approved funding for it to expand to El Salvador and reach 500 businesses there. This doesn’t seem like a huge number, but given the potential of energy efficiency, this can have a large impact on emissions. We are very proud of these efforts.

Which finance instruments did you create with the Lab since its creation and how much money did you raise since then?

The Lab has identified, developed, and endorsed eight instruments over the two years of operation. Through the Lab network, these instruments have raised nearly 600 million in seed capital for renewable energy, energy efficiency, sustainable agriculture, and adaptation projects. As these projects get off the ground, our analysis shows that this seed capital will have a catalytic effect in unlocking private investment in these sectors.

Interview by Anne-Sophie Garrigou